http://www.jewishworldreview.com --
THE FED CHAIRMAN'S recent musings on the "diminishing pool of available
labor" -- which Wayne Angell and John Ryding have linked to Karl Marx's
Reserve Army of Labor (necessary to sustain capitalism) -- have spawned an
analytical cottage industry tracking movements in the so-called pool of
available workers as a leading inflation indicator.

But I have two big problems with this whole line of reasoning. First,
inflation is monetary-induced, not wage-driven.

Across-the-board price hikes -- be they from wages, services,
commodities, rents, interest rates, or whatever, are only possible when the
Fed creates excess money that reduces the dollar's buying power. Inflation
is caused by too much money chasing too few goods, not too many people
working, producing and prospering.

My second problem with Mr. Greenspan's modernized Marxism is that a
careful examination of the jobs data suggests that the so-called labor supply
scarcity theory is bogus.

If there were a true labor supply shortage, then wage growth should be
increasing. Big time. But the data suggest that wage growth is slowing, not
accelerating. So the reserve army must be sufficient, not scarce.

This suggests a different labor market analysis: softening labor demand
is slowing employment growth. Mr. Greenspan and his merry band of Pavlovian
bond-traders should be happy. At the margin, fewer people are working,
producing and prospering.

Let's look at some facts. Total nonfarm payroll growth has slowed to
2.1% over the past twelve months from a 2.9% rate in early 1998. By sector,
the same story unfolds.

( Job growth in services has slipped to 3.9% in November from a 4.8% peak in
late 1997.

( Manufacturing jobs peaked in early 1998 at a 1.7% growth, but after a
261,000 loss are lately dropping at a 1.6% rate.

( Despite strong holiday sales on-line and on land, retail trade payroll
growth is down slightly from 2.5% last summer to 1.9% in November.

Now, along with low inflation expectations, slower employment gains provide a
better explanation of lagging wage growth than labor supply shortages.
Overall wage growth should be rising to 5% under the labor shortage theory.
Instead, average hourly earnings for private nonfarm workers has slowed to
3.6% over the past three months from a 4.4% peak registered in early 1998
(measured over 12-month intervals). This moderation shows up in the key
sectors.

( Wage growth in services has slowed to 3.6% from over 5.1% early this year.

( The financial and real estate sector, which had recorded booming wage
growth of 6.6% in early 1998, has slowed markedly to 2.3% by November.

( Retail trade wage growth dropped from 5.2% in mid 1998 to 3.4% last
September. During the brisk holiday selling season this sector has bounced
up to 4.1%, still way below its prior peak.

( Manufacturing has strengthened from only 1 3/4% growth in late 1998 to over
4% last summer, and most recently registered a 3.4% gain. However, this is
the highest reported productivity sector -- 5.7% over the past year, with
unit labor costs deflating at a 0.8% rate.

Now, some analysts argue that the wage data understate the true upward push
in compensation. Retailers, for example, are offering non-cash benefits in
the form of deep price discounts for clothing and other products for their
employees. Also, a number of firms are enticing new hires with spiffed-up
job training programs.

Well, there's nothing new about non-cash benefits. Personal tax burdens have
been rising, largely from real income tax bracket creep and higher Social
Security payroll tax thresholds. So it's no wonder that employees seek
non-cash forms of compensation, from clothing discounts right up to deferred
compensation bonus plans, including stock options.

A more interesting point than understated wages is the New Economy rise in
productivity, which has lowered unit wage costs and increased profits.
Nonfarm output-per-hour for the business sector is up over 3.1% during the
past year, while non-financial productivity has risen by nearly 4%.

If the government properly counted software, telecommunications and the
Internet, productivity rates would be even stronger. This is why S&P 500
operating earnings are rising almost 25% over the past year.

The bottom line point to all this is that the overall economy is sound.
Inflation is low, productivity is high, wages are moderate and profits are
strong. If there is a shift in labor market conditions, it's a small
downward move in the demand curve, not the supply curve.

If there were a labor force shortage, then wages should be rising
excessively. But it's not happening. Mr. Greenspan works from the same data
files as everyone else. Surely he sees this.

Fact is, neither bond traders nor workers have had a great year. Long-term
Treasury rates have jumped from under 5% to over 6%. Real average hourly
earnings growth has fallen from nearly 3% in early 1998 to 1% currently.
OPEC has had something to do with this. So has Mr. Greenspan.

One final point. The long-run objective of promoting greater labor force
supply will best be met by reducing government obstacles to work, not by
raising interest rates. To wit: remove immigration limits, eliminate the
Social Security earnings test for healthier retirees who wish part- or
full-time work (as Gov. Bush has proposed), and reduce the tax-rate on
personal and FICA payroll incomes.

Workers work for real wages, after-tax. The best medicine for labor and
capital is King Dollar and lower marginal tax-rates.

Remember Art Laffer's supply-side dictum: tax something more, you get less of
it. Tax something less, you get more of it. Like other factors, the labor
supply responds quickly to tax incentives and regulatory relief. Marx is
dead and wrong. Laffer is alive and right. Greenspan can seek
redemption.